FACULTY OF ECONOMICS
FINANCIAL INSTITUTIONS IN TURKEY
BY: ALTYNBEK USUPBAEV
Financial Institutions in Turkey
Financial institutions are the parts of the financial system. The
financial system is the complex structure, and every year it channels
billions of dollars, euros, yens, Turkish liras from savers to people
with productive investment opportunities. Financial institutions
commonly separated as depository institutions and as non-bank
Our major target in this paper is to have a wide look at financial
institutions in Turkey. For easy work and best understanding it makes
sense to follow mere wisdom “think globally- do locally”. So, in order
to make a proper outline, I plan firstly work on general financial
institutions all over the world, and then look whether they exists in
Turkey, their structure and how they work.
Non-bank Financial Institutions
Although depository institutions, or by other words banks are the
financial institutions we deal with most often, they are not the only
financial institutions we come in contact with. In such transactions
like purchasing insurance from insurance company, or buying a share of
common stock with the help of the broker, we are dealing with non-bank
The role of non-bank financial institutions is to transfer funds from
lenders-savers to borrowers-spenders. In the time of technological
progress, non-bank financial institutions innovate new services, and now
compete more directly with banks by providing banklike services to their
Insurance Companies: Every day we face the possibility of the occurrence
of certain catastrophic events that could lead to large financial
losses. Because these losses could be large relative to our financial
resources, people found the solution by buying insurance coverage that
will compensate the sum of money if catastrophic events occur.
Life Insurance Companies: The first life insurance company in the United
States (Presbyterian Ministers’ Fund in Philadelphia) was established in
1759, in Turkey it was established in 1893 by Osmanli Sigorta, a member
of Osmanli Bank. In 1918 was created ?ttihad-i Milli – the first
insurance company created by Turkish laws. This huge difference in time
was because insurance in Ottoman Empire was accepted as gambling, and
correspondingly was forbidden. But after two great fires in Beyoglu and
Kumkapi (Stanbul) in 1870 the laws were rearranged, and gave permission
for foreign insurance companies to service in Ottoman Empire.
Life insurance company sells policies that provide income if a person
dies and incapacitated by illness, or retire. Such companies are
organized in two forms: as stock companies or as mutual companies. Stock
companies are owned by stockholders; mutuals are technically owned by
Because death rates for population as whole are predictable with a high
degree of certainty, life insurance companies can accurately predict
what their payouts to policyholders will be in the future. Consequently,
they hold long-term assets that are not particularly liquid – corporate
bonds and commercial mortgages as well as some corporate stocks.
There are two principal forms of life insurance policies: permanent life
insurance (such as whole, universal, and variable life) and temporary
insurance (such as term). Permanent life insurances policies have a
constant premium throughout the life of the policy. In the early years
of the policy the size of the premium exceeds the amount needed to
ensure against death because the probability of death is low. Thus the
policy builds up a cash value in its early years. But in later years the
cash value declines because the constant premiums falls below the amount
needed to ensure against death, the probability of which is now higher.
Term insurance, by contrast, has premiums that are matched every year to
the amount needed to ensure against death during the period of the term
(for example one or five years). Hence term policies have no cash value,
thus, in contrast to permanent life policies, provide insurance only,
with no savings aspects.
Property And Casualty Insurance Companies: Property and casualty
insurance companies specialize in policies that pay fro losses incurred
as a result of accidents, fire, or theft. Property and casualty
insurance companies same as life insurance companies separated both as
stock and mutual companies, and regulated by government. The investment
policies of property and casualty insurance companies are affected by
two basic facts. First, because they are subject to income taxes, the
largest share of their assets is held in tax-exempt municipal bonds.
Second, because property losses are more uncertain than the death rate
in a population, these insurers are less able to predict how much they
will have to pay policyholders than life insurance companies are. The
earthquake in Izmit in 1999 exposed the property and casualty insurance
companies to huge losses. Therefore, property and casualty insurance
companies hold more liquid assets than life insurance companies.
Property and casualty insurance companies will insure against losses
from any type of events, including fire, theft, negligence, malpractice,
earthquakes, and automobile accidents. If possible loss being insured is
too large for any firm, several firms may join together to write a
policy in order to share the risk. Insurance companies may also reduce
their risk exposure by obtaining reinsurance. Reinsurance allocates a
portion of the risk to another company in exchange for a portion of the
premium and is particularly important for small insurance companies. The
most famous risk-sharing operation is Lloyd’s of London, an association
in which different insurance companies underwrite a fraction of an
insurance policy. In Turkey the reinsurance activities also widely used,
there is many companies that deal with other insurance companies by
reinsurancing. As an example we could give Marsh Reinsurance that give
reinsurance service and reinsure into the reinsurance companies abroad
directly or through reinsurance brokers. There is also the Association
of Insurance and Reinsurance Companies of Turkey located in Istanbul.
Pension Funds: in performing the financial intermediation function of
asset transformation, pension funds provide the public with another kind
of protection: income payments on retirement.
There is an important increase in share of pension funds due to tax
policy, because employer contribution to an employee pension plans are
tax-deductive. Furthermore, tax policy has also encouraged employee
contribution to pension funds by making them tax-deductible as well as
enabling self-employed individuals to open up their own tax-sheltered
pension plans, Keogh plans, and individuals retirement accounts (IRAs).
Because the benefits paid out of the pension fund each year are highly
predictable, pension funds invest in long-term securities, with the bulk
of their asset holdings in bonds, stocks, and long-term mortgages. The
key management issues for pension funds revolve around asset management:
Pension fund managers try to hold assets with high expected returns and
lower risk through diversification.
The structure of pension funds in Turkey changed over time, affected by
global changes in economic world. For example in the past, pension funds
hold about 99% of their funds in government bonds and only 1% in stocks.
But currently, when stock performs outstanding performance, pension
funds hold about 25% of their funds in stocks. Pension funds are now the
dominant players in the stock market.
Pension funds in Turkey are two types: private pension funds and public
pension plans. Private pension funds are administrated by the banks, a
life insurance companies, or a pension fund manager. Anadolu Emeklilik
is live example for private pension funds. SSK, Emekli Sandigi are
public pension plans, that are give services to public workers.
Beside this, pension funds are highly related with the trust. Households
will not save their money in banks, pension funds, or other financial
institutions if they have no trust to them. The government plays here an
important role in protection household savings and regulating the
structural work of financial institutions. The legal legislation, like
FDIC increases the trust of people to the banks and others. As long as
households trust to private pension funds they deal with them.
Many turkish banks also gives private pension fund services (Ak Bank- Ak
Emeklilik), and outstanding increase in pension funds rate is also
related to people trust to the turkish banking, as well as to the
Finance Companies: Financial companies acquire funds by issuing
commercial paper or stocks and bond or borrowing from banks, and they
use the proceeds to make loans (often for small amounts) that are
particularly well suited to consume and business needs. The financial
intermediation process of finance companies can be described by saying
that they borrow in large amounts, but often lend in small amounts- a
process quite different from that of banking institutions, which collect
deposits in small amounts and often make large loans. There are three
types of financial companies in Turkey: sales, consumers, and business.
Sales Finance Companies are owned by a particular retailing or a
manufacturing company and make loans to consumers to purchase items from
that company. Sales finance companies compete directly with banks for
consumer loans and are used by consumers because loans can frequently be
obtained faster and more conveniently at the location where an item is
Consumer Finance Companies make loans to consumers to by particular
items such as furniture or home appliance, to make home improvements, or
to help refinance small debts. Consumer finance companies are separate
corporations, or are owned by banks. Typically, these companies make
loans to consumers who can not obtain credit from other sources and
charge higher interest rates.
Business Finance Companies provide specialized forms of credit to
businesses by making loans and purchasing accounts receivable at a
discount; this provision of credit is called factoring. Besides
factoring business finance companies also specialize in leasing
equipment, which they purchase and then lease to businesses for a set
number of years.
Mutual Funds: Mutual Funds are financial intermediaries that pool the
resources of many small investors by selling them shares and using the
proceeds to by securities. Through the asset transformation process of
issuing shares in small denominations and buying large blocks of
securities, mutual funds can take advantage of volume discounts on
brokerage commissions and purchase diversified holdings (portfolios) of
securities. Mutual funds allow the small investors to obtain the
benefits of lower transaction costs in purchasing securities and to take
advantage of the reduction of risk by diversifying the portfolio of
securities held. Many mutual funds are run by brokerage firms, but
others are run by banks, or independent investment advisers.
Mutual funds have seen a large increase in their market share due
primarily to the booming stock market. Another source of growth was the
specialization of mutual funds in dept instruments.
Funds that purchase common stocks may specialize even further and invest
solely in foreign securities or in specialized industries, such as
energy or high technology. Funds that purchase debt instruments may
specialize further in corporate, government, or tax- exempt bonds, or in
long-term or short-term securities.
Mutual Funds are primarily held by households (around 80%) with the rest
hold by other financial institutions and non financial businesses.
Depository institutions, or simply banks are the most important of all
financial intermediaries and are generally the first place we go when we
decide to borrow money to buy a car, or go to holiday.
Bank strategy simply is collecting small deposits and making big loans,
and as all economic units pursues the goal to maximize their profits.
Generally banks and Turkish banks as well have four primary concerns:
the first is to make sure that the bank has enough ready cash to pay its
depositors when there are deposit outflows, that is, when deposits are
lost because depositors make withdrawals and demand payment. To keep
enough cash on hand, the bank must engage liquidity management, the
acquiring assets to meet the banks obligation to depositors.
Second, the bank must pursue the acceptably low level of risk by
acquiring assets that have a low rate of default and by diversifying
asset holdings. The third concern is to acquire funds at low cost, and
finally they must decide the amount of capital they should maintain and
then acquire the needed capital.
The banking sector constitutes a great part of the Turkish financial
system. Many of the transactions and activities taking place in both
money and capital markets are carried out by banks. Turkey’s financial
system and its banking sector are virtually synonymous as a consequence
of the country’s economic and historical development.
There are a number of factors that give banking its prominent role in
the Turkish economy. These are:
-The economic structure peculiar to Turkey,
-The choice to turn resources into long-term investments through the
banks for the objectives targeted in the development plans and annual
programs, and the establishment of banks by the state to finance certain
-Extensive application of continental European banking practices as a
model in the legal structure of the banking system and
-The lack of a full-fledged capital market.
The development of the Turkish banking sector can be analyzed within six
separate periods, which differ as to policy and method:
The Period of the Money-changers and the Galata bankers (pre-1847):
During this period, all quasi-banking activities were carried out by
money-changers. The Galata bankers consisted mostly of the
ethnic-minorities in Istanbul.
The Period of Foreign Banks (1847-1908):
Since the financial situation of the Ottoman Empire deteriorated after
the Crimean war, the Empire faced the need for external financial
support. Representatives of several foreign banks came to Istanbul with
the purpose of extending credits to the Empire at high interest rates.
The Ottoman Bank (Osmanl? Bankas?) was established in 1856. Its head
office was in London and served as the Central Bank until the 1930s.
Development of National Banking and Implementation of Etatism
The years following the proclamation of the Second Constitution (1908)
gave rise to the national banking movement, which was a reaction to
Twenty-four national banks were established in Istanbul and Anatolia
between the years 1908 and 1923. However, foreign banks continued to
dominate banking activities due to the consecutive wars (1911-1922),
capitulations granted to foreigners and scarcity of national capital.
In 1923, the first National Economic Congress held in Izmir dealt with
a large number of economic problems that the country would have to
solve. The Congress took the decision that banks would be established to
finance the main sectors of the economy. T. ?? Bankas? (1924), Sanayi ve
Maadin Bankas? (1925), and Emlak ve Eytam Bankas? (1927) were
established to provide commercial, industrial and housing credits,
However, the adverse effects of the Great Depression on the balance of
payments and the lack of domestic capital called for a
government-supported economic development policy in subsequent years. As
a result of this policy, six state banks were established in the 1930s,
including the Central Bank of the Turkish Republic.
Development of Private Banks (1945-1960)
Despite the adverse effects of the Second World War, a significant rate
of growth and industrialization was achieved with the support of the
newly established state banks, which created a tremendous increase in
capital stock of the private sector.
Beginning in the early 1950s, etatism weakened because of positive
developments in the private sector, expansion of international
cooperation and transition to a multi-party political system. A more
liberal and private sector oriented policy was adopted in the following
years, and as a result, more than 30 private banks were established by
Planned Development Period (1961-1979)
A new “planned development” policy was adopted in the beginning of the
1960s. According to this system, the state would administer the economy
and issue recommendations to the private sector through five-year plans
As recommended in the plans, several development and investment banks
were established to finance various sectors in the 1960s and 1970s such
as the Tourism Bank (Turizm Bankas?) in 1960, Industrial Investment Bank
(Sinai Yat?r?m Bankas? A.?.) in 1963, State Investment Bank (Devlet
Yat?r?m Bankas?) in 1964, and the State Industry and Worker’s Investment
Bank (Devlet Sanayi ve ??ci Yat?r?m Bankas?) in 1975.
Liberalization and Internationalization in Banking (post-1980)
A new liberal economic policy began to be implemented in January 1980,
which aimed at integration with world markets by establishing a free
market economy. As a reflection of this policy, the 1980s witnessed
continuous legal, structural and institutional changes and developments
in the Turkish banking sector. During these years, a series of reforms
were adopted to promote financial market development. The main aim of
these reforms was to increase the efficiency of the financial system by
fostering competition among banks.
In this context, interest and foreign exchange rates were liberalized,
new entrants to the banking system were permitted and foreign banks were
encouraged to operate in Turkey. Turkish banks intensified their
business relations abroad either by purchasing banks in foreign
countries or by opening branches and representative offices. The
liberalization of foreign exchange regulations increased the foreign
exchange transactions in the banks. Beginning in 1984, the special
finance institutions, operating according to Islamic banking principles,
also became part of the financial system.
The Interbank Money Market, which is administrated by the Central Bank,
was established in 1986 with the purpose of regulating liquidity in the
A uniform accounting plan and accounting principles as well as a
standard reporting system were adopted in the same year. In 1987, the
application of external auditing of the banks in accordance with
internationally accepted accounting principles was started.
In addition, legal and institutional arrangements were introduced to
foster the development of the capital market. As a result, banks began
to provide additional services such as consultancy and trading in
securities, underwriting fund management, establishing mutual funds and
Besides diversifying their services, banks improved their technological
infrastructure by extensive use of computer systems; began employing
more qualified human resources; and at the same time put an emphasis on
LEGAL FRAMEWORK AND SUPERVISION OF THE BANKING SYSTEM
Banks are institutions by which funds accumulating in the economy are
collected and channeled to investors. This makes the public supervision
of banks essential.
All banks in Turkey are subject to the Banks Act and to the provisions
of other laws pertaining to banks. The new Banks Act No.4389, which
brought substantial differences, was issued on June 23rd, 1999. Prior to
the changes in the Banks Act, the Undersecretariat of the Treasury and
the Central Bank had been the two main regulatory and supervisory bodies
in the banking sector. With the new Act, the Banking Regulation and
Supervision Agency (BRSA) were formed, which had financial and
administrative autonomy. The mission of the Agency is to safeguard the
rights and benefits of depositors and create the proper environment in
which banks and financial institutions can operate with market
discipline, in a healthy, efficient and globally competitive manner,
thus contributing to the achievement of long-run economic growth and
stability of the country.
With the establishment of the BRSA, the Savings Deposits Insurance Fund
(SDIF), which had been under the authority of the Central Bank, began to
operate under the administration of the BRSA. However, with the
enactment of Act No. 5020 on December 26, 2003, the management of the
SDIF was separated from the management of the BRSA.
The decision-making body of the Agency is the Banking Regulation and
Supervision Board (BRSB), which is appointed by the Council of Ministers
and consists of seven members. Following the appointment of the members
of the Board, the Agency commenced its operations as of August 31, 2000.
Banks in Turkey have the status of joint-stock companies and are
subject to general controls under the provisions of the Turkish
Commercial Code and of various tax laws. Besides, banks are subject to
special supervision by the Banking Regulation and Supervision Agency. As
the representative body of the banking sector, the Banks Association of
Turkey (BAT) aims at protecting and promoting the professional interests
of its members.
The BRSA exercises its supervisory authority on a direct and ongoing
basis through the Board of Sworn Bank Auditors who is responsible for
on-site examination of the banks in terms of legal considerations and
financial soundness. Additionally, the banks’ financial statements are
audited by external auditors in accordance with internationally accepted
accounting principles. Banks are also examined by their own auditors,
who are required to submit quarterly reports to the BRSA.
Recently, the supervisory system has been further strengthened by
legislative arrangements and a number of decisions taken in accordance
with the standards of the prudential regulation exercised by the
international banking community and in general covered the following
banking related areas:
?? Foreign exchange exposures,
? Capital adequacy,
??Internal control and risk management,
? Lending limits
? Conditions to be met by bank owners,
? Bank ownership control in transfer of shares,
? Consolidated and cross-border supervision of banks,
? Accounting standards for financial disclosure purposes,
??Prudential reporting and loan loss provisioning.
Moreover, during 2003 and 2004, several improvements have been realized
in terms of regulative and legislative framework of the Turkish banking
? SDIF has been separated from the administration of the BRSA and
its legislative framework has been renewed for the collection non
performing loans from the debtors of SDIF banks.
? In July 2004, savings deposit insurance was limited to 50
billion TL (50 thousand New Turkish Lira (YTL), approximately 37.250
USD), which is expected to decrease the moral hazard effect.
? Risk based deposit insurance system has been settled.
? In order to increase intermediation costs, stamp duties and
charges on loans were removed, deposit insurance premiums were decreased
considerably and special transaction taxes on deposits were lifted.
Furthermore the government has eliminated the Resource Utilization Fund
on commercial loans.
? Accounting standards has been brought mostly in lines with
International Accounting Standards.
Also some legislative changes and new targets are expected to realize in
? The new banking act, draft act on financial services, prepared
by BRSA is expected to become into force. The draft act aims at setting
a competitive environment, reducing the risks and bringing transparency
in the banking sector.
? In order to improve the efficiency of supervision of the
banking sector, risk based supervision model is being designed by BRSA.
? Given the recent technological innovations in financial sector
more emphasis will be put into IT based audit systems.
? A new draft law on credit cards is being prepared by BRSA.
? It is expected that regulation and supervision power of non
bank financial institutions to be transferred from Treasury of Turkey to
THE RECENT BANKING SECTOR RESTRUCTURING PROGRAM
Following the November 2000 and February 2001 crises, which had negative
impacts both on the economy and the banking system, an extensive
streamlining plan; Banking Sector Restructuring Program was started and
announced to the public in May 2001 by the BRSA. The restructuring
program was based on the following main pillars: (1) Restructuring of
state banks, (2) Prompt resolution of SDIF banks, (3) Strengthening of
private banks, and (4) Strengthening the regulatory and supervisory
framework. Progresses achieved in these fields are presented below:
?????x?d???????3? significant steps have been taken within the framework
of operational restructuring. Besides, the number of branches of the
state banks which was 2,494 as of December 2000 was reduced to 2.236 as
of December 2004; and the number of personnel which was 61,601 was
reduced to 39.454.
2) Resolution of SDIF Banks; 21 banks were taken over by the SDIF
between 1997 and 2003. After the BRSA began to operate on August 31,
2000 (in addition to the existing eight banks) the administration of 13
banks was assumed by the SDIF according to the resolutions of the BRSA.
Of these 21 banks, 13 banks were merged; five banks were sold to
domestic and foreign investors; and the licenses of two banks were
revoked. By the end of December 2004 there was one bank which remained
under the administration of the SDIF, Bay?nd?rbank, the bridge bank for
the resolution of the SDIF banks.
3) Strengthening the Private Banking System; Within the scope of the
program focused on private banks, primary steps were taken towards
strengthening the capital structures of private banks with their own
resources and limiting market risks. 25 private banks were subjected to
a three-phase audit process. Cash capital increases, correction of
provisions set aside for non–performing loans, positive changes
engendered in the market risk and valuation of securities were taken
into account during these evaluations and accordingly, three banks were
determined to have capital requirements. The capital requirements of
these banks were provided either by their shareholders and or by the
allocation of subordinated loans given by the SDIF upon BRSA decisions.
With the improvement observed in profitability, the average capital
adequacy ratio of the private banks was recorded at 28.2% as of December
4) Strengthening the regulatory and supervisory framework
Concurrently with the financial and operational restructuring of the
banking sector, significant progress has been made in legal and
institutional regulations. Within this context, regulations were issued
to prevent risk concentration in loans, limit participation of banks in
non-bank financial institutions and ensure preparation and disclosure of
the balance sheets of the banks in compliance with international
accounting standards. Among many other structural reforms, the banking
reform intended to upgrade and modernize the current rules and in
general covered the following banking related areas: capital adequacy,
foreign exchange exposure, internal control and risk management, deposit
guarantee schemes, accounting standards for financial disclosure
purposes, prudential reporting and loan-loss provisions.
As a result, the restructuring program resulted in the following in the
The banking sector entered a consolidation process.
The significance of state-owned and SDIF banks in the system has
Financial risks in the banking sector have been reduced to manageable
The capital structure of the sector has been strengthened.
The sector has re-entered a growth period.
The profitability performance of private banks has improved and
state-owned banks have started to generate profit.
At the end of September 2004, the Turkish banks numbers were as follow:
Number of Banks
And lastly, let’s say few words on this table. As we can see, after
banking crisis in November 2000 and February 2001, the numbers of
commercial banks as well as all other banks has declined significantly.
If in 1999 number of commercial banks were 62, in 2004 it has declined
to 35. These crisis’s has huge negative impact on Turkish banking
system, but nevertheless, it is still take the bull by the horns, and
as many foreign banking giants as HSBC, Citibank, Fortis have entered
the Turkish banking market it is sounds like it’s has a potential
capacity and bright future.
F.S. Mishkin “The Economics of Money, Banking and Financial Markets”
Colombia University Press